Spain's Borrowing Costs Skyrocket After Second Downgrade

German Chancellor Angela Merkel is seen on a screen as a broker arrives at the stock exchange in Madrid on Thursday.

Paul White
/ AP

After Moody's became the second ratings agency to downgrade Spain's sovereign debt, the country's borrowing costs skyrocketed to record highs.

"The interest rate — or yield — on the country's benchmark 10-year bonds rose to a record 6.96 percent in early trading Thursday, its highest level since Spain joined the euro in 1999 and close to the level which many analysts believe is unsustainable in the long term," the AP reports.

Moody's followed Fitch, yesterday, when it rated Spain Baa3, just one grade above "junk status."

Of course this follows a weekend deal that provided Spain with a 100 billion euro bailout from the eurozone. The markets reacted positively at first, but then fears mounted that Spain might not be able to repay the bailout.

AFP reports this does not bode well for the uneasy situation in Europe, which is also watching Greek elections that may ultimately decide if Greece stays in the eurozone.

The AFP adds:

"Such high interest rates are regarded by many analysts as impossible for the nation to afford to finance its activities over the longer term, raising the risk of a bigger bailout, just as was the case for Greece, Ireland and neighbour Portugal. ...

"Since many institutional investors are barred from buying bonds that are rated as junk, or non-investment grade, the prospect of a further downgrade sent a further chill through the market.

"'The risk of losing investment grade pressured the differential this morning and left it at historic highs,' analysts at Spanish brokerage Renta 4 said in a market report."

As if that's not enough bad news, the AP reports that Italy's borrowing costs also increased. Three-year bonds went for 5.13 percent, up from 3.91 percent. Ten-year bonds went for 6.13 percent and the 15-year ones sold at 6.1 percent.

"Italian auctions are now as nerve-wracking as Spanish ones," sovereign debt expert Nicholas Spiro of Spiro Strategy told the AP.